UBS House View Daily

Thought of the day

17.08 - China deleveraging still lined up

Chinese credit showed unexpectedly rapid growth in July, according to new data released this week. An adjusted UBS measure of total social financing (TSF, ex-equity and local government bonds) accelerated to a 15.3% annualized pace in July, from 14.5% in June. This follows a downshift in July activity data and, on the surface, runs counter to market expectations for a renewed deleveraging push in the second half. But there are a number of reasons the July rebound in TSF doesn’t suggest a change of heart for Chinese policymakers targeting excess leverage and credit:

The downtrend is intact: The TSF growth figures in part reflect a low base from last year (CNY 479bn), an effect which will fade from August. Borrowing costs are on the rise due to supervisory tightening and a prudent People's Bank of China,. The weighted-average interest rate of general bank loans edged up 8bps to 5.71% by June from the end of 1Q17. And combined activity data for June (strong) and July (weak) reveals that growth remains resilient enough to withstand further deleveraging.

Shadow lending: Elevated TSF growth was accompanied by record-low M2 growth (+9.2% y/y) and weak off-balance sheet lending activity. This suggests the government is working to shift lending away from shadow credit and back onto the balance sheet, without affecting the real economy’s funding needs.

Top-down policy: President Xi Jinping’s speech at a mid-July regulatory conference was clear, calling on financial services to "go back to the origin" and refocus on “serving the real economy.” Tighter credit conditions may also become politically easier after the 19th Party Congress this autumn.

So July credit signals should not be taken as a sign China backing away from much needed deleveraging. All signs point to a carefully controlled descent in the second half that won’t threaten the current growth trajectory. We remain overweight China in our Asia tactical asset allocation.